Month in Review: May 2014

By the resi financial blog team, 07 May 2014

The Reserve Bank of Australia has kept the cash rate on hold at 2.5 per cent for the ninth consecutive month. The result was widely expected by economists, however, this month there were hints that the RBA was more optimistic around the jobs market.

RBA governor Glenn Stevens said demand for labour had been weak over the past year and this has fed into the rise in the unemployment rate. “More recently, there has been some improvement in indicators for the labour market,” he says. “But it will probably be some time yet before unemployment declines consistently.”

Mr Stevens also noted that wage growth had declined and this had been reflected in the latest price data. “Inflation is consistent with the target,” he says. “If domestic costs remain contained, that should continue to be the case over the next one to two years, even with lower levels of the exchange rate.”

The recent inflation announcement – which was softer than expected at 2.9 per cent for the quarter – has given the RBA more time to consider when it might increase rates. Another consideration is the May federal budget, which is expected to contain spending cuts and may lead to rates staying at this level for some time.

The low interest rates are feeding into housing construction approvals in most major cities. Home building approvals were down 3.5 per cent in March, following a 5.4 per cent fall in February according to the Australian Bureau of Statistics. However, approvals are still at 19-year highs.

Mr Stevens says monetary policy remains accommodative. “Interest rates are very low and savers continue to look for higher returns in response to low rates on safe instruments,” he says. “Credit growth has picked up a little, while dwelling prices have increased significantly over the past year.”

The exchange rate has proven a problem for the RBA but it has been experiencing declines from its highs a year ago. This will assist the economy in achieving balanced growth, although concerns remain over its strength.

While the cash rate appears set to remain at this level for at least the short term, borrowers should start factoring in higher rates into their mortgage calculations to ensure they can meet their commitments when rates do eventually rise.